Nick Shaxson has a post on the Tax Justice Network blog explaining why the destination based cash flow tax (DBCFT) is a terrible idea as a replacement for corporation tax. I am pleased that he has: this idea is truly terrible. As Nick notes:
As the IMF's Christine Lagarde remarked on March 10, “we need a fundamental rethink on international taxation.”
Some of us have been saying that for a long time. But DBCFT is nit the answer, nick provides considerable evidence on his blog. I recommend reading it in full. And I stress, Nick is fair: he tries to find merit where he can. Here, though, I pick out just one of the ten flaws Nick identifies:
The CIT serves many key purposes, beyond just raising revenue, so abolishing it would do away with many of its key functions. The most important, perhaps, is the CIT's role in serving as a backstop to the personal income tax system. That's because if you cut corporate tax rates too far, rich folk will arrange to convert their ordinary income into corporate forms, paid into shell companies, in order to pay the lower corporate rate instead of the ordinary income tax. This cannibalises the income tax system, and the revenue losses are potentially enormous. (This is one of the main reasons why most countries set up the CIT system in the first place.) The DBCFT removes this prop to the income tax system. That's because it's a sales-based tax, and these personal shell companies aren't generally in the business of making sales: they are set up to accrue (and defer) income and capital gains.
In a related matter, the corporate income tax also penetrates many trusts and other fortress-like vehicles for holding unaccountable wealth: even if the beneficial owners of such vehicles may be able to escape paying tax on their income, the underlying corporate holdings generally do pay CIT. So it serves many other vital purposes, and its abolition would generate a wide range of harms (as we noted in our document Ten Reasons to Defend the Corporate Income Tax.)
There is no defence possible from the DBCFT promoters in this issue. It simply fails at this level. Just as it fails to provide any effective basis for taxing investment income and capital gains in companies. Any government seeking a level of tax revenue to manage its fiscal budget will then, if DBCFT was in use, have to shift taxes onto individuals and consumption in that case because DBCFT effectively exempts the wealthy and capital from much of the (already little) tax that they might owe at present.
Do the proponents of this tax really not realise this? If not, why not?
And if they do, why are they still proposing it? That is a question that they have to answer.
In the meantime, DBCFT is a disaster, and as Nick says, there is a better alternative:
The better alternative, as we've mentioned – the only reasonable alternative, we believe – is some version of Unitary Tax with Formula Apportionment. We've just made a submission to the OECD on this basis.
With such a system, you take a multinational's total global profits. Then you apportion or allocate those profits between countries according to a formula, which may be based on (for example) how large its sales are in each country, and also how large its workforce is in each place. Then that country can tax their allocated portion of global profits at whatever rate you like.
This is also the approach favoured by ICRICT, and it is also examined favourably in another new IMF paper. Curiously, the leading academic proponent of the DBCFT, Mike Devereux, co-authored an article in favour of this system in 2009. It's not clear why he changed his mind, given that he had previously proposed the DBCFT in 2002.
This system would of course have its own difficulties and complexities, but it is without doubt the most rational and internally coherent system, and the way forward for tax justice.
Now, with the international tax system starting to come apart at the seams, it's time to push for the right approach.
And the Destination Based Cash Flow Tax isn't it.
I agree with Nick.
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I accept the demerits of DBCFT, but I would also wish to urge caution in placing great confidence in a tax that relies on a measure of profit; or rather I should write the word as ‘profit’. The determination of ‘profit’ is, I suspect akin to the crew of a fast sinking ship spending their whole time carefully quantifying the precise volume inflow of water; they are always likely to be overtaken by events.
I do not doubt that the identification of ‘profit’ worked very well in Renaissance Venice, after Luca Pacioli discovered the principle of double-entry book-keeping, but the Venetians had a very different understanding of the nature of a ‘venture’ to our own; combined with the capacity to measure reasonably accurately the financial returns of a ‘venture’, than the protean modern concept of a ‘venture’ allows, especially following the invention of the accounting ‘going concern principle’, combined with the taxation of corporate profits, the invention of the tax haven, and the globalisation of trade.
I personally still think we can determine profit
If not the whole of accountancy is a waste of time
And then there would be almost no tax bases at all
I happily defer to your superior knowledge of modern accountancy: but while I am sure we can determine a quantum representing ‘profit’, that may prove of some general if imprecise utility (at least to some financial statement users, and for short periods of time), I remain doubtful that it is sufficently robust in the circumstances and travails of the real world, to provide a rigorous test of universalisable authority.
I believe your own robust and comprehensive critique of tax havens, of audits, of accounting standards, of HMRC, and so on provides much evidence for my case; and therefore should not solely be seen as testing the rigour of the application of well understood but authentic, reliable rules, or the detailed accuracy and exactness of the rules themselves, or the competence of those who apply them; but actually reveals something of much more profound significance; the weakness of the underlying theory of ‘profit’ – demonstrating that it is, principally an abstract, metaphysical entity with an insecure grip on reality; or at least represents a version of reality that knowledgable and resourceful tax-payers (for example) will always be able, largely to manipulate, or avoid.
Would accounting really perish if there was no ‘profit’? I am less sure than you, although it may reduce the scale of the profession.
The concept of profit we have is, I agree, deeply flawed
Does accountancy need one? Yes. The books would not balance without it, ultimately
Richard,
May I thank you for that considered, candid and fair-minded response to my musings. I think it sums up why I come here.
I do not ‘do’ smiley emojis.
Perish the thought that the people who are pushing a new variant on taxation might be doing it deliberately badly for their own benefit, or the benefit of the people advising (and paying ?) them….I mean….. ‘People don’t do things like that…..”
And if I remember rightly Hedda then did shoot herself too with her father’s pistol.
Personally, I don’t think there is much chance of a DBCFT being implemented, but …
Do the proponents of DBCFT really suggest not taxing capital gains or investment income?
Just on capital gains, wouldn’t a cash flow tax involve taxing the cash flows as and when they occur? Capital gains tend to arise on the sale of a capital asset, and you will know where that sale takes place (typically where the capital asset is located).
Who is the end consumer of investment income and capital gains?
Just sticking to capital gains, surely the purchaser of my capital asset is the “consumer”. It would seem a bit odd to allow a business to deduct capital expenses without taxing capital receipts.
But that is not the basis for this tax….
At least as we see it
And we have challenged the authors of it